The pound weakened against the dollar
for a third day after an industry group lowered the U.K.’s
growth forecasts and Standard & Poor’s cut Greece’s sovereign
debt rating, curbing investor demand for higher-yielding assets.

Sterling depreciated versus all but two of its 16 major
peers, losing most against the Norwegian krone. Gross domestic
product will rise 1.7 percent in 2011 compared with a February
estimate of 1.8 percent, the Confederation of British Industry
said in quarterly forecasts today.

“The Greek downgrade has added to the negative bent in the
market and people are selling risky currencies as a result,”
said Shant Movsesian, a strategist in London at 4Cast Ltd., a
research company that counts central banks among its
subscribers. “Cable’s come off a bit on the back of that,”
Movsesian said, referring to the pound-dollar exchange rate.

The pound weakened 0.3 percent to $1.6319 and depreciated
0.2 percent to 131.73 yen as of 4:38 p.m. in London. Sterling
slid as much as 0.8 percent to 88.18 pence per euro before
trading little changed at 87.45.

The pound erased losses against the euro after S&P lowered
Greece’s debt rating by two steps to B from BB-, dimming the
appeal of the shared currency.

S&P’s lowering of Greece’s debt rating was the fourth by
the company since April last year, leaving the Mediterranean
nation within one reduction of having Europe’s worst ranking of
creditworthiness. The euro fell below $1.43 for the first time
in more than two weeks on concern the 17-member region’s debt
crisis may worsen.

House Prices

News of the downgrade followed a report by London-based
Halifax that showed U.K. house prices contracted 1.4 percent in
April from the previous month, compared with 0.1 percent growth
estimated in a Bloomberg survey. Economic growth next year will
be 2.2 percent instead of 2.3 percent, the CBI said.

“The data has been weak and the problem is that we haven’t
yet seen the full impact of the fiscal cuts on the economy,”
said Sarah Hewin, a senior economist at Standard Chartered Bank
in London. “That means the data is likely to get worse, which
will allow the Bank of England to keep rates steady for longer.
That will certainly keep the pound under pressure.”

The Bank of England kept its benchmark interest rate
unchanged at a record low 0.5 percent on May 5 to boost the
economy, which grew 0.5 percent in the first quarter after a
similar-magnitude contraction in the final three months of last
year. Slowing economic growth comes as Britain implements the
deepest government spending cuts since World War II, threatening
to drag output lower.

Inflation Target

The central bank’s monetary policy stance is also being
complicated by inflation, which is accelerating at twice its 2
percent target. Inflation unexpectedly eased to 4 percent in
March, following five months of acceleration to a more than two-
year high of 4.4 percent in February.

“Growth will remain weak and we see no rate hike in
2011,” said Hewin. “Rate hikes have been pushed back. We see
the first rate hike in the first quarter of 2012.”

Money markets are factoring in a 25 basis-point increase in
the central bank’s main rate by year-end, according to sterling
overnight index average forwards, Tullett Prebon Plc data show.

U.K. government bonds rose, with the yield on the 10-year
gilt declining two basis points to 3.36 percent. The two-year
note yielded 0.99 percent, two basis points lower than the
previous close.

Short-sterling futures rose, lowering the implied yield on
the contract expiring in March 2012 by one basis point to 1.25
percent, as traders pared bets on expectations for rate
increases next year.